The most common quantitative tool for value for money assessment of a PPP project is derived from the approach originally used in the United Kingdom's PFI program in the early 1990s as described in Leigland's Gridlines article on the PSC [#175]. It involves comparing the fiscal cost of a PPP delivery options with that of a conventional public delivery option.
The focus of the Fiscal Cost approach to Value for Money analysis is the construction of a Public Sector comparator (PSC)-the cost to government of implementing the project through traditional public procurement. Calculating the PSC can be complicated, as several adjustments are needed to ensure a fair comparison. Box 3.4: How the Public Sector Comparator is Calculated, and highlights some methodological debates.
This type of PSC can be used at two stages of the procurement process, as described in the OECD book's chapter on the economics of PPPs [#194, pages 71-72]. These are:
• Before the bidding process-the PSC can be compared with a 'shadow' or 'reference' PPP, or 'market comparator'-a model of the expected cost of the project under the PPP option. This can help identify whether the PPP can be expected to provide value for money, before deciding to go ahead with detailed preparation and procurement. The reference PPP model would be the same as the financial model described in Section 3.2.2: Assessing Commercial Viability.
• During the bidding process-the PSC can also be compared with actual PPP bids received, to assess whether the bids provide value for money. This approach is used in Australia, and is described in a PSC Technical Note [#14].
Despite the appealing logic of the concept, there have been many criticisms of the usefulness of the PSC and fiscal cost comparison approach in countries where it has been used frequently, such as the United Kingdom and Australia. A United Kingdom House of Lords' review of the PPP program, for example, argued that shortage of relevant data and methodological issues limit the value of the PSC. The government's response to the review agrees that the PSC provides only a partial picture, and highlights that its use is balanced with qualitative analysis, as described above.
Leigland's Gridlines article on the PSC [#175, pages 2-3] summarizes these criticisms, which include the inevitable inaccuracy of estimates over a long-term project, lack of consensus on methodology, and so the possibility of manipulation to reach the desired conclusion. Grimsey and Lewis [#119, pages 362-371] describe some of these criticisms in more detail. Given these challenges, Leigland's Gridlines article [#175, pages 3-4] also discusses whether and how the PSC approach could make sense in a developing country context.
Box 3.4: How the Public Sector Comparator is Calculated Calculating a PSC can be complex. The starting point is typically the best estimate of the capital cost and lifetime operations and maintenance cost of implementing the project under public procurement. This is typically adjusted, to enable a fair comparison between the PSC and the PPP. The Infrastructure Australia guidance note on PSC [#15, Section 2.3] describes two types of adjustment: • Risk adjustments-one of the main differences between traditional procurement and the PPP approach is that the PPP transfers more risks to the private party. The return on investment expected by the private party will take into account these transferred risks. This means that to make a fair comparison, the PSC should also take into account the cost of these risks • "Competitive neutrality" adjustments-a public sector project or enterprise may have cost advantages or disadvantages compared to private company, which create costs or benefits to the government that are not normally taken into account when considering the cost of a traditionally procured project. For example the tax liabilities under the two options may be different. These differences should be corrected for in calculating the PSC. There are also differences in the timing of payments between the PPP option-where payments are often spread over time-and traditional procurement, where the government must meet construction costs upfront. The streams of payments are usually converted into net present values, to give a single value for comparison. This requires defining the appropriate discount rate to apply to future cash flows in both the PPP and PSC models. The following provide further descriptions and examples of how the PSC is used and calculated in different countries: • The United Kingdom Treasury's detailed guidance for quantitative PSC assessment was recalled in 2013, being replaced with a mix of qualitative and quantitative assessment • South Africa's PPP Manual Module on the PPP Feasibility Study includes a detailed description of how to calculate and use the PSC [#219, Module 4, pages 17-49] • Colombia's technical note on PSC analysis [#56] defines the concepts of PSC and value for money, and provides both detailed guidance and an example of how to calculate the PSC. Methodological differences and challenges Although the PSC has been widely used, the particular methodology differs between countries, and there is on-going debate on several methodological points. For example, Shugart's article on the PSC [#215] highlights two related issues: which is the appropriate discount rate to use when calculating present values, and how the cost of risk should be taken into account. Grimsey and Lewis [#118] and Gray, Hall and Pollard [#117] both a so focus on the choice of discount rate, and its relationship with risk allocation under PPP and traditional procurement. Partnerships Victoria's FAQs and Common Problems in PSC Development [#21] also touch on these issues, and describe some other common problems. Some countries in Latin America, such as Colombia and Perú, have developed guidelines for implementing the Public Sector Comparator methodology. However, due to lack of capacity and or trustworthy information to implement such a complex methodology, none of these countries have implemented the full methodology in practice. The World Bank report on Value for Money assessment practices [#293, pages 23-28] reviews methodological evolution and practices in several governments with significant PPP experience, including the United Kingdom, France, India, Chile, the state of Virginia, and British Columbia, Canada. |